This article first appeared in The Edge Malaysia Weekly on December 4, 2017 - December 10, 2017

AFTER a positive set of results for the quarter ended September from several players in the semiconductor-related sector, analysts are expecting the momentum to continue into the fourth quarter, driven by sustained growth in demand for smart devices.

For the third quarter ended Sept 30 (3QFY2017), Globetronics Technology Bhd reported a 57% year-on-year jump in its net profit to RM14.38 million from RM9.15 million, amid higher volume loadings and the commencement of the production of new products. Quarterly revenue grew 66% to RM87.01 million.

The group’s results were also lifted by a foreign exchange gain of RM55,000 versus a loss of RM1 million in the preceding year.

Inari Amertron Bhd’s net profit increased 42% y-o-y to RM68.38 million in the first quarter ended Sept 30, 2017 (1QFY2018).

Revenue for the quarter rose 32% y-o-y to RM373.09 million. The group attributed the positive performance to higher demand for its existing and new products.

The companies’ results were in line with the rise in global semiconductor sales, which grew 22% y-o-y to US$107.9 billion in the third quarter of this year — the highest global quarterly sales ever recorded.

MIDF Amanah Investment Bank Bhd analyst Martin Foo says demand for the iPhone X has been good, which will benefit those in the Apple supply chain.

He points out that Inari Amertron — which works closely with Apple’s supplier, Broadcom Ltd — cut down on dividend payments in the third quarter, despite posting good numbers.

“I think the company is conserving cash for capital expenditure. It’s a good signal as it seems to be preparing some cash ahead of any surprise ramp-up in production, which means that demand could be higher,” says Foo.

Next year, he expects demand for new smart devices to remain strong and continue to support semiconductor players.

“In terms of product launches, people are already talking about the Samsung [Galaxy] S9 and the next generation of iPhones after iPhone X. When there are new launches, there will be demand for new components.

“Unless the launches are delayed to the following year, semiconductor players will continue to perform,” Foo explains.

AmInvestment Bank Bhd analyst Lavis Chong says the outlook for semiconductor players in the fourth quarter is positive, amid elevated demand due to the upcoming Christmas holidays.

“Semiconductor players such as Inari Amertron and Salutica [Bhd] have been ramping up production and the demand for new devices has been great for most,” says Chong.

Apart from the smart devices segment, the increase in the use of semiconductors in vehicles will also support players involved in the automotive segment, such as Malaysian Pacific Industries Bhd (MPI) and Unisem Bhd, he adds.

The automotive segment is more stable in terms of earnings growth as the product lifecycle is not as short as that of smart devices, which could see at least two new product launches each year.

Cars do not get replaced as fast, which gives longer-term visibility to players involved in automotive-related semiconductor components.

However, MPI did not see bottom-line growth in its first quarter ended Sept 30, reporting a 9% y-o-y decline in net profit to RM36.24 million due to higher material costs and commodity prices during the period.

Unisem did not see significant growth either, with a 5% y-o-y increase in net profit to RM40.45 million, compared with the double-digit growth recorded by other local players during the same period.

“Increasing semiconductor content, especially sensors, in vehicles will underpin the growth of players with considerable exposure to the automotive sub-segment, such as MPI.

“However, the qualification process of a new product can take a long time — two years in many cases. Thus, meaningful earnings from this sub-segment are not expected to kick in until 2019,” says Chong.

Another potential area of growth is the supply of components for devices that utilise smart speakers, such as Amazon’s Alexa, Apple’s HomePod and Google Home.

Chong expects earnings of semiconductor players next year to exceed those in 2017. But their valuations are not compelling currently, especially with the recent strengthening in the ringgit, he says.

At the time of writing, the ringgit was trading at 4.0815 to the US dollar compared with levels of around 4.45 in November last year.

The stronger ringgit is also seen as a dampener for semiconductor businesses, considering that the industry is export oriented and most sales are denominated in US dollars.

Hong Leong Investment Bank Bhd analyst Tan J Young says, “If the ringgit remains at current levels, there should still be room for local players to grow, in tandem with the global semiconductor outlook.

“Having said that, we do not think that the growth next year will be as strong as this year’s.”

Affin Hwang Investment Bank Bhd analyst Kevin Low sees further upside for semiconductor players next year, but only on selected stocks.

He says the appreciation of the ringgit could be negative for certain companies that are not seeing much revenue growth, referring to MPI and Unisem, which were negatively impacted by the stronger local currency in their latest quarterly results.

“The names we prefer are Globetronics, Inari Amertron and KESM Industries Bhd. These companies have strong growth drivers that will support revenue and earnings expansion going forward.

“We expect earnings to improve in the first quarter of next year, and the momentum should carry through for the remainder of the year. Obviously, the numbers will not be as strong as this year but we could still see mid-single-digit growth,” says Low.

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